Since education makes a person more likely to leave your region, how do you justify your investment in human capital?

Tuesday, October 24, 2006

Venture Capital Geography

Pittsblog already tagged the Sunday New York Times article about Silicon Valley venture capital not straying more than 20 minutes from home. I'm not so much interested in the rule as in the exception:

Sequoia makes its preference for the 20-minute rule almost explicit, telling applicants whose companies are at the “seed stage” (receiving less than $1 million) or “early stage” ($1 million to $10 million) that “it is helpful if the company is close to our offices” because they “require very frequent contact.”

Kleiner Perkins has only one office, the one in Menlo Park. Sequoia has reached out to entrepreneurs more considerately, providing five offices. But only one of the five, the one in Menlo Park, is in the United States. The others are in China (two), India and Israel.

If you have a brilliant idea for the New New Thing and want Sequoia to provide its funds and blessing — using the same golden touch provided not long ago to Google’s founders — you would be much better off in Beijing, where Sequoia has an office, than in Boston, where it does not.

Why does Sequoia have an office in Beijing but not in Pittsburgh or other American cities? China, India, and Israel are countries where former Silicon Valley entrepreneurs are now incubating start-ups in the places where they were born. These countries provide unique growth opportunities. There is little reason or ability for these companies to relocate to the United States. In other words, the 20-minute rule is untenable.

That isn't the case domestically. If you want Silicon Valley venture capital, you'll have to move there. My point is that this money moves along an established network of trust. Investments in far off countries demonstrate that the risk isn't about a lack of proximity for the start up to the funder. If a bunch of entrepreneurs living in Silicon Valley decide to move back to their homeland in Pittsburgh (if there is such a notable group), they can still tap their contacts in California. I wouldn't be surprised to see a venture capital firm open an office in Pittsburgh if there was sufficient demand for it.